FEMSA 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed April 28, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB. Amounts below are in Mexican pesos (Ps.) unless noted; dollar translations use Ps. 18.86 per US$1 for convenience.
Business context
FEMSA is a diversified Mexican holding company with Coca-Cola FEMSA bottling operations, FEMSA Comercio’s OXXO proximity stores and health and fuel divisions, a 14.76% economic interest in Heineken, and other businesses. Mexico generated 68.4% of consolidated revenue in 2019. Reported results reflect acquisitions, foreign-currency translation, Argentina’s hyperinflation accounting, and Coca-Cola FEMSA’s 2018 sale of its Philippines business.
Financial and operating performance
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Total revenue | Ps. 506,711 million | Ps. 469,744 million | Up 7.9% |
| Gross profit / margin | Ps. 191,481 million / 37.8% | Ps. 175,170 million / 37.3% | Gross profit up 9.3%; margin up 0.5 percentage point |
| Income before tax and equity-accounted investees | Ps. 32,296 million | Ps. 33,630 million | Down 4.0% |
| Income taxes / effective tax rate | Ps. 10,476 million / 32.4% | Ps. 10,169 million / 30.2% | Higher effective rate |
| Share of equity-accounted investee profit, net of tax | Ps. 6,228 million | Ps. 6,252 million | Primarily reflects Heineken |
| Consolidated net income | Ps. 28,048 million | Ps. 33,079 million | Down 15.2%; 2018 included discontinued operations |
| Operating cash flow from continuing operations | Ps. 61,638 million | Ps. 46,929 million | Up Ps. 14,709 million |
| Investing cash flow from continuing operations | Ps. (14,132) million | Ps. (57,178) million | 2018 included substantial investment purchases |
| Financing cash flow from continuing operations | Ps. (38,433) million | Ps. (23,011) million | Includes debt, dividends and lease payments |
| Cash and cash equivalents | Ps. 65,562 million | Ps. 62,047 million | Current investments were Ps. 12,366 million |
| Total debt, excluding lease liabilities | Ps. 117,951 million | Ps. 128,664 million | Ps. 16,204 million was short-term, including current maturities |
| Lease liabilities | Ps. 54,679 million | Not restated | Recognized following IFRS 16 adoption |
| Capital expenditures, net of disposals | Ps. 25,579 million | Ps. 24,266 million | Up 5.4% |
Material changes and segment trends
- Coca-Cola FEMSA revenue rose 6.7% to Ps. 194,471 million; sales volume increased 1.4%. Gross margin contracted 1.0 percentage point to 45.0%, reflecting concentrate costs, currency effects and Brazilian tax-credit changes.
- Proximity Division revenue increased 10.4% to Ps. 184,810 million, supported by 1,331 net new OXXO stores and 5.0% same-store sales growth. Same-store traffic declined 1.0%, partly offset by a 6.1% increase in average ticket.
- Health Division revenue rose 13.9% to Ps. 58,922 million, including GPF’s 620 Ecuadorian stores; same-store sales declined 3.7%, with disruption in Chile and currency translation weighing on results.
- Fuel Division revenue grew 2.0% to Ps. 47,852 million, while same-station sales fell 4.2%; volume declined 9.6% as prices and competition increased.
- FEMSA acquired Ecuadorian pharmacy operator GPF and Brazilian logistics company AGV, acquired a 50% interest in Raízen’s convenience-store business, and invested in Jetro Restaurant Depot. It acquired the remaining 40% of Socofar in January 2020.
Outlook, risks and unusual items
- Outlook: FEMSA budgeted 2020 capital expenditures of approximately Ps. 24,321 million (US$1,138 million), subject to change. The filing provides no clear consolidated earnings or revenue guidance.
- COVID-19: The filing says the outbreak’s full effect could not be reasonably estimated as of April 2020. Management cited closures, social-distancing measures, shifts in sales channels, potential supply disruptions and currency volatility; it also expected impacts on Heineken.
- IFRS 16: Adoption on January 1, 2019 added lease assets and liabilities; comparative periods were not restated. Lease-related interest expense was Ps. 4,774 million in 2019, affecting financing costs and cash flows.
- Other unusual items: Net income was affected by foreign-exchange losses on FEMSA’s US-dollar cash position and the absence of 2018 discontinued-operation earnings. Other expenses included restructuring severance and impairment charges; other income included a Brazilian tax recovery.
- Contingencies: Recorded loss contingencies totaled Ps. 8,854 million. Additional unreserved contingencies assessed as more than remote but less than probable totaled Ps. 81,683 million. Brazilian tax contingencies of Ps. 10,471 million were collateralized.
- Key risks: Dependence on Coca-Cola Company bottler agreements and concentrate supply; currency, commodity and interest-rate exposure; consumer, tax and packaging regulation; water availability; competition and economic conditions; acquisitions and integration; and cybersecurity. Legal matters include a pending Unilever Brazil arbitration and challenges concerning packaging and recycling requirements.
- Dividend: Shareholders approved a Ps. 10,360 million cash dividend for fiscal 2019, payable by November 5, 2020 in one or two installments. Payment depends on cash received from subsidiaries.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The internal-control assessment excluded GPF and AGV, acquired during 2019.
Most important facts for investors to verify
- Reconcile revenue growth with segment performance, acquisition effects, foreign exchange and reported versus comparable Coca-Cola FEMSA results.
- Assess the recurring earnings trend separately from currency effects, discontinued operations, impairments, tax recoveries and IFRS 16 changes.
- Review debt maturities, lease obligations, cash availability across subsidiaries and the effect of subsequent 2020 borrowing and refinancing.
- Track COVID-19 effects, the 2020 capital-spending plan and whether the approved dividend is paid as scheduled.
- Evaluate the size, timing and potential outcomes of the unreserved contingencies, Brazilian tax disputes and packaging-related legal matters.